Most Important Best Place to Retire Criteria: Taxes, Affordability, or Location?

November 23, 2009 – It’s impossible to see into the minds of our readers to try to assess their motivations in finding their best place to retire. We do, however, have some evidence based on which of our articles get read the most. No surprise, articles on low-tax states and most affordable always attract many readers. As in that rude truism, “It’s the Economy, Stupid”.

One of our pet peeves is the overemphasis that many people place on low taxes as a retirement criteria. In this article we will argue why overall affordability and location should be more important than blind allegiance to the “lower taxes is better” search priority.

First, with the exception of property taxes, most taxes are based on your income. If your retirement financial position hasn’t worked out as well as you wanted, then income is what you tend not to have. So paying taxes on that lack of income shouldn’t be much of a problem. If you choose to live in a state that doesn’t tax social security income that’s a plus, but not an overwhelming factor. Some examples might help illustrate the point. Assuming that you will get $20,000 from social security a year, at a typical state income tax rate of 5% you would pay $1000 in state income taxes before exemptions. Not trivial, but perhaps not a big-enough reason to move to a different state. The potential payoff gets better in a state that also doesn’t tax pension income. Assuming you also get a nice pension of $20,000, you will save an additional $1000 in states that exempt that form of income.

Unless your investment portfolio is very large and very successful, the taxes on your dividends and interest income are going to also be very small. If your $100,000 portfolio could throw off $5,000 in income, then that would mean another $250 in taxes. Sales tax is not that big a factor either. Assuming you spent $20,000 a year on taxable items (food, clothing, and some other items are often exempt), that would be another $1000 you would save if the state sales tax was 5%.

Seven states have no income tax, while 5 have no sales tax. Alaska, the most expensive place to live in the U.S., is the only state with neither a state or an income tax. You can find a complete list of states that do not have income or sales taxes at our “Most Tax-Friendly States“. The Tax Institute has a good approach to this issue, where they look at overall tax burden (where all taxes are combined). The 3 states with the lowest tax burdens are Alabama, Delaware, and Tennessee.

Another factor about taxes is that most, but not all of the time, taxes are associated with services provided. The low tax states have typically lagged behind in support for schools, libraries, social services, etc. Be prepared for fewer services in lower tax states, a factor which sometimes results in lower property values and appreciation. Taxpayer revolts about tax increases and service cuts can lead to social and inter-generational strife, as we saw last week in the California university system.

Property tax is to a certain extent a regressive tax – it is based on the value of your home or property, not your income. So if you continue to live in your current home after retirement, but now have a greatly reduced income, don’t expect to see your tax bills correspond to your changing ability to pay. If you pay high property taxes now and are worried about money, it makes sense to either downsize in your current community or move to state or town where property taxes are lower.

Overall affordability. To us, overall affordability is a better criteria for selecting a new retirement town or state than is tax-friendliness. Is real estate less expensive, allowing you to maintain your state of living but take equity out of the home you are selling? Are income, sales, and property taxes lower? Is the overall cost of living (energy, food, services) lower? Is there a chance to work part-time to make some income? The combined weight of these factors can be a lot more important than tax reasons alone. You can use this site, your library, and government sites to get a handle on overall affordability.

Location. In our opinion location should be the number 1 priority in your retirement decision, assuming you have sufficient income to have several options. People who retire near their children or friends are often happier than those who decide to move far away from them. Obviously if you or the children/grandchildren are willing to travel, that could be less of an issue. What is the community like – is it pretty, the homes well-maintained, and the zoning strong? Weather, climate, and available activities associated with particular locations are also important in letting you pursue the lifestyle that keeps you busy, active, and fulfilled.

Bottom line: We are of the opinion that life is meant to be lived. So basing important retirement lifestyle decisions on taxes is like having the tail wag the dog. Please be sure to contribute your comments and opinions in the comments below.

For further reference:
20 Most Affordable Places to Retire